Maryland S Corporation: Everything You Need to Know
A Maryland S-Corporation allows business owners to protect their personal property from being used to satisfy business debts.3 min read
2. Requirements to Form an S-Corporation
3. Ownership Rules When Comparing an S-Corporation and an LLC
4. How Do LLCs and S-Corporations Compare With Income Tax?
5. Management and Organizational Structure Comparison
Forming a Maryland S-Corporation or Maryland LLC allows business owners to protect their personal property from being used to satisfy business debts and to reduce the amount of their company's tax liability to as low as they can.
To decide whether an LLC or S-Corporation will be the best entity choice for your business, comparing the two options is essential.
Requirements to Form an LLC
To form an LLC in the state of Maryland, you will need to file your Articles of Incorporation by sending them into the Maryland State Department of Assessments and Taxation. Their website has an available form that you can download as a template. You will need to send in the forms along with the LLC filing fee.
Requirements to Form an S-Corporation
When you decide to incorporate your business, you will start by filing your articles of incorporation with the Maryland State Department of Assessment and Taxation. This will be the same process whether you are deciding to go with a C-corporation or an S-corporation. When filing your incorporation papers, the owners of the company will be termed as shareholders.
Once your Articles of Incorporation are filed with your filing fee and approved, your business will be established as a C-corporation. Your next step to becoming an S-corporation will be to file From 2553 with the IRS to elect S-corporation tax status.
Ownership Rules When Comparing an S-Corporation and an LLC
When it comes to ownership of an S-corporation, the IRS lays some strict rules that must be adhered to continue to reap the tax benefits of an S-corporation. The requirements imposed on shareholders in an S-corporation include the following:
- The S-corporation must have less than 100 total shareholders.
- There can only be one type of stock issued for an S-corporation.
- Shareholders cannot be non-resident aliens.
Any violation of these rules can result in the loss of S-corporation status and the risk of being re-classed as a C-corporation, a change that will backdate to the violation. An LLC does not impose these restrictions, and there is no limit on the number of members of an LLC. An LLC also allows other corporations and partnerships to be owners, although it does not allow the issuing of stock, which can hurt the ability to attract outside investors.
How Do LLCs and S-Corporations Compare With Income Tax?
One of the most common reasons that a business entity wishes to be taxed as an S-corporation is to avoid the double taxation that occurs with a C-corporation structure. In a C-corporation, the corporation will pay taxes on their profits, plus shareholders will have to pay taxes on the dividends they earn. Thus, profits are taxed twice.
An S-corporation employs pass-through taxation similar to a partnership, which allows the corporation not to pay tax at the corporate level and have the tax liability occur at the shareholder level. In contrast, an LLC is a disregarded entity by the IRS, so LLCs have a little more flexibility in their choice of taxation.
LLC members have the options of treating their taxes as though their business was a partnership, corporation, or sole proprietorship. To designate which tax option an LLC will file with, they will need to file a Form 8832 to select the entity classification with the IRS. If an LLC chooses to be taxed as a corporation, they also have the option to choose an S-Corporation election. This is a popular option with single-member LLCs who want to avoid paying the self-employment taxes that sole proprietorships will be required to pay.
Management and Organizational Structure Comparison
The State of Maryland requires specific management and organizational requirements that provide the biggest distinction between the two entities. An S-corporation will be required to follow a more strict organization structure with certain requirements, such as the following:
- Adopting company bylaws
- Holding annual shareholder meetings
- Electing a board of directors
- Appointing a president, secretary, and treasurer
An LLC will not be subject to any of the above organizational requirements. An LLC can be managed by all members, one member, or a designated non-member.
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